6/24/2010 @ 1:20PM

Blaming BP

As a sea of oil slops over sand, oysters and pelicans in the Gulf, it seems natural to blame the entity that made this happen–
BP
. The Gulf disaster could have easily been avoided–from the well design, to the defective seals, to the haphazard response, topped off with the lack of any backup plan. It doesn’t help that
BP
is a big, rich, oil company. The company will likely be sued and castigated in courts and markets.

But personifying and blaming the entity is a misguided basis for forming public policy.

For starters,
BP
has no existence other than as the legal owner of its brand and other property. Although real people associated with BP erred, the legal fiction called BP is no more fitting an object of blame than any legal instrument. To paraphrase the popular expression: contracts don’t slime people, people do.

Congress temporarily solved this problem by hauling in Tony Hayward rather than BP. Putting a living, grimacing human in the dock made for more effective theater than berating a certificate of incorporation. But the CEO credibly disclaimed responsibility for detailed management of each of BP’s hundreds of wells. Surely BP’s shareholders would want him to be frying bigger policy fish than that. Nor would they necessarily begrudge him a day off to watch a yacht race. The victims may have derived some satisfaction from Hayward’s discomfort, but in the end oysters were still dying.

If anybody should be responsible for the oil spill, it is those with ultimate control over the firm–the shareholders. But while the owners will ultimately bear the cost of any dip in share price, they are not suitable scapegoats. Surely shareholders would rather BP had spent millions on reasonable precautions than risk billions in potential liability. This isn’t a case where the organization pursued the interests of greedy individuals. Other oil firms took precautions, including using a safer deepwater drill, because they were greedy enough to want to protect their profits. Blaming shareholders would be particularly out of sync with the supposed need for governance reforms to increase shareholders’ power. Indeed, BP’s current shareholders may not even have owned the firm when these risks were taken. Even Anadarko, a substantial minority owner of the Macando well leaking into the Gulf, noisily disclaims responsibility.

If we are looking for individuals with a big stake in BP’s success, perhaps the blame belongs to its employees, franchisees and suppliers. Indeed, BP employees made the decisions that led to the catastrophe. They, in turn, responded to incentives established by other employees. Yet no one thinks blaming employees will help stop the leak or prevent future ones.

Blaming BP reflects an unrealistic Hollywood portrayal of business in which evil corporations lurk menacingly in the background of modern ills but it’s never clear what they’re doing back there. The film Erin Brockovich never shows any
Pacific Gas & Electric
(
PG&E
) employees directly responsible for poisoning wells. The real culprit lurks somewhere behind the walls of a distant power plant. Filmmakers must use these symbols because they cannot tell a realistic story of corporations clearly and entertainingly. It may make for better television but it does not encourage responsible policymaking.

This fiction works well for politicians. As Congress knows well, most recently with
Goldman Sachs
and derivatives, constructing villains makes policies inconsistent with the villain’s interests more politically palatable. In BP’s case these policies include less drilling, cap and trade, alternative energy. Vilifying BP enabled the Obama administration to threaten the firm into quickly parting with $20 billion. The strategy was so effective that one congressman who criticized it was taken to the woodshed. Corporate vilification also helps take the blame off the executive branch in reacting to the spill–a luxury the Bush administration did not have with Katrina.

In this setting the concept of personal blame is unproductive. Our system places responsibility on enterprises, diffusing individual risk and encouraging socially beneficial business activity. These enterprises cannot wreak harm with impunity. Regulations constrain their actions and liability and fines affect their ability to earn a profit from causing social harm. The law caps BP’s liability unless it is grossly negligent, to balance the need for caution against society’s need for risk-taking in drilling for oil, and recognizing that even a careful firm faces huge costs and reputational harm from a disastrous spill. If this policy is inadequate, we should change it going forward. Blaming BP and changing the policy retroactively to punish it is inconsistent with the clear legal rules and property rights that help capitalism function properly.

The alternative is to acknowledge the futility of blaming individual corporations and blame the capitalist system that creates this state of affairs. But capitalism has worked pretty well so far, including for the environment–at least better than the polluted environments that Communist regimes have produced. Let’s hope we now have the maturity to trust our system and to preserve the appropriate market and regulatory spheres. Congress and the Obama administration should focus on how to prevent the next accident, rather than obfuscating the issues and wasting time in a primitive pursuit of a flesh-and-blood villain.

Larry E. Ribstein is the Mildred Van Voorhis Jones Chair in Law and the associate dean for research at University of Illinois College of Law. He blogs at Truth on the Market.